Is the Stock Market Predicting an Obama Win?

Despite a lackluster jobs report last Friday, President Obama is basking in a 6-point jump in the polls, according to CNN. On Intrade, the influential site where people wager on political outcomes as if it were a futures market, prices for people betting that Obama will win the election have also surged over the past few days: On Sunday, he was trading at $5.82. By Wednesday, the price had bumped to $6.32. (Shares on Intrade convert to percentages, so the share move means his likelihood of winning went from 58 percent to 63 percent.)

Pundits and journalists like to pay attention to Intrade, because the site has accurately predicted the past two presidential elections down to the electoral vote count. Traders are constantly on the prowl for any morsel of news—a slip-up at a campaign event, a problematic remark made by a surrogate—whatever information they can trade on before the rest of the pack gets onto it. On election night, when the contest is decided, those who bet on Romney essentially pay those who bet on Obama at the share price they bought in. (For more on how Intrade works, see my story from last February.)

But Intraders didn’t react particularly strongly to Obama’s performance in Charlotte. After former President Bill Clinton’s stellar speech on the second night of the convention, Obama shares on Intrade moved up just 0.3 percent. They moved down 0.1 percent the following night, after his own speech. The DNC speeches themselves did not move the needle for Intraders. (The RNC was a different story: Clint Eastwood’s comments pushed Romney’s share price down right away.)

What happened was this: When voters reacted strongly over the weekend, Intraders took the hint and began trading in response to Monday’s polls.

Looking at Obama’s performance on Intrade over the past year and a half, you’ll see that Intraders react strongly to big news events: Obama reached a high point in May 2011, when Osama Bin Laden was killed, and traders rated his chances of winning the presidency at 70 percent. By October, the Republican primaries were in full swing, jobs reports weren’t looking good, and Obama was trading in the mid to high 40s—a record low. In the following months, Obama’s chances improved slightly, but he hasn’t traded above 60 percent all summer. Until now.

But the best way to understand Obama’s performance on Intrade may not be to follow the political news cycle or even jobs reports. Thanks to a tip from an Intrader (and help from my graphics whiz colleague Stephen Rose), I graphed Obama’s performance onto the S&P 500 stocks index. Looks like the guy was onto something. When the S&P dropped below 1,300 in June, Obama’s likelihood of winning on Intrade dipped into the low 50s. The S&P has been steadily recovering since July, and so has Obama’s share price. From the graphic, you can see it clearly: Obama’s performance on Intrade roughly mirrors the movements of the stock market.

How to explain the correlation? Many Intraders are actual traders in real life. So their day-job mindset—”risk on” or “risk off”—may carry over to their thoughts about whether the country is on the right course. That aligns with the Larry Kudlow theory, as expressed by the CNBC commentator back in 2007 about the Bush administration and another stock rally:

“I have long believed that stock markets are the best barometer of the health, wealth, and security of a nation. And today’s stock market message is an unmistakable vote of confidence for the president.”

Kudlow’s statement has been thrown back at him in recent days by Paul Krugman and others. If stocks continue their run through Nov. 6, we may find out if he’s right.

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